Property and your financial plan
Whether it’s a discussion about buying a family home or building a property portfolio, the steps to successful investing remain the same. You need to understand why you are investing, how that investment is going to meet your needs and what compromise you will need to make to get there. Being clear on the answer to ‘why’ lays the foundation for determining the best steps on ‘how’ you do it.
Whether you are looking to buy your first home, upgrade to a new home or invest towards your retirement, it’s ideal that you can hold your asset for as long as possible. One of the biggest errors people make is that they do not think forward far enough on their decision and when a property is subsequently sold, after only a relatively short time of holding it, it leads to tax implications and transaction costs, that may have otherwise been avoided if there had been adequate planning in the first place.
The most successful property investors we see are focused on buying quality assets that are affordable for their circumstances and, as such, these investors are not put in the position where they are forced to sell, when they otherwise would choose not to. They have properly considered the ideal ownership structure, to minimise risk of losing the investment by being sued and considerate of tax implications. They have also considered their other goals and objectives for the future and how a significant capital purchase in property could impact on these plans.
When making the decision to invest into property as part of your financial plan, it is essential to understand the real cost of your property. The interest cost of holding it is one aspect, but consideration must also be made to the other related costs, such as rates, maintenance, capital improvements, property management and buy and sell costs. All of these costs combined over the life of the property represent the true cost base or hurdle rate of the investment to put you in profit.
When viewing the property market on the whole, it’s important to understand that it is made up of a series of sub-markets. The median property price in a major capital city, for example, is the average of the performance of all collective suburbs in that city. Naturally, this means that some suburbs are performing better than the median of the city and some are underperforming. The same principal then applies when investing in a particular suburb, there is a median made up of all sales in that suburb, but this means that some areas within a suburb have outperformed others. This level of analysis can come down to the asset selection on an individual street or selection of streets and there can even be a range of factors why the performance of one property on a street has a considerably better growth profile than another on the same street. This level of understanding of the asset that is being bought, can go a long way towards the long term growth of the chosen asset.
With this in mind, it is essential to really understand the market you are investing into as you don’t want to over pay for your property. We’ve all heard the stories about record prices being achieved and the speculation that price overshoots value and you don’t want this to be you. The only way you can truly feel confident that you have paid fair value in this scenario is to have a good enough understanding of where value sits in a market. While this can take months of time watching the suburb — both online and attending open for inspections and auctions — it could prove a very valuable use of your time and in turn result in a better investment outcome. The alternative for which could be comprehensive sales analysis of an area from sources such as RP Data or to outsource this to a full time buyers advocate who understands the market you want to invest in.
Property is so expensive and for most of us who may only purchase one or two properties in our lifetime, it can be a very expensive lesson to get wrong.
James McFall, CFP®
Yield Financial Planning
The Advice Exchange http://www.yieldfinancialplanning.com.au/
James is the founding director of Yield Financial Planning and has over 15 years experience. A CERTIFIED FINANCIAL PLANNER® professional, he also holds a Master of Commerce (Financial Planning), and a diploma of Financial Planning.
Whether you are a professional or business owner, retired or contemplating retirement, James and the team at Yield are committed to helping you grow your wealth sustainably, protect your downside and retire with confidence and peace of mind.
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